KNOWLEDGE FLOW AND SEQUENTIAL INNOVATION:IMPLICATIONS FOR TECHNOLOGY DIFFUSION, R&DAND MARKET VALUE

It is shown that spillovers can enhance private returns to innovation if they feedback into the dynamic research of the original inventor (Internalized spillovers), butwill always reduce private returns, if the original inventor does not benefit fromthe advancements other inventors build into the “spilled” knowledge (Externalizedspillovers). I empirically identify unique patterns of knowledge flows (based onpatent citations), which provide information about whether “spilled” knowledge isreabsorbed by its inventor. A simple model of sequential innovation with dynamicspillovers is developed, which predicts that market value and R&D expendituresshould rise with Internalized spillovers and fall with Externalized spillovers. Thesepredications are confirmed using panel data on U.S. firms between 1981 and 2001.To the extent that firms internalize some of the spillovers they create, the classicalunderinvestment problem in R&D will be mitigated and the central role of spilloversin promoting economic growth will be enhanced....